The trade war between China and the US has occupied the front page of mass media worldwide for quite a long time. At the same time, competitions in other industries such as 5G, Artificial Intelligence, aerospace exploration have exacerbated this gaming between the two biggest economic entities. However, the basic infrastructure and international policies are even more crucial in the long term confrontation at a national level.
The prosperity of a country’s economy is closely related to its infrastructure in the payment system (including clearing system and settlement system) and its credit system. China has fallen behind developed countries in both areas for centuries. Until recent years, the payment industry, especially the mobile payment industry in China has surpassed many developed countries in the payment coverage and transaction volume. On the other hand, the credit rating industry is catching up quickly but still facing a large gap when compared with the credit systems in the countries such as the US and Germany.
Therefore, in this article, we will look into one of the key infrastructures in China, the personal crediting rating industry, to compare it with the traditional personal credit rating approach, find the key players in the market and draw some questions on its future regulation and industry integration.
According to the People's Bank of China (PBOC), the resident loans in financial institutions gain great momentum in recent four years. The four-year CAGR of consumer loans from 2013 to 2017 was as high as 24.9%, of which medium and long-term consumer loans accounted for nearly 80% of the total amount.
Moreover, as the internet finance enters the stage of substantive business development, more financial activities will be completed through the network. In an iReach report in 2017, China’s internet consumer finance loan amount will reach nearly CNY 10 trillion.
The great volume and potential in China's financial market baring a higher risk of system risk as the variety and complexity of future business will generate more individual information data. Therefore, a healthy economy is inseparable to a reliable credit system.
China’s Credit System
In China, the credit rating market has been formed into a system dominated by PBOC and assisted by the market-based credit rating agencies. The credit rating system is divided into two parts: corporate credit and personal credit.
The corporate credit information basic database began in 1997 and achieved nationwide online inquiry in July 2006. While the personal credit information basic database was first started in 1999, and completed at the end of August 2005 operated together with all commercial banks and some qualified Rural Credit Cooperatives (农村信用社) in the country. In January 2006, the basic database of personal credit information was officially launched.
In 2013, the PBOC promulgated the Regulations on the Credit Information Management, announcing that in addition to the Credit Reference Center of PBOC (中国人民银行征信中心), it allowed other corporate credit agencies to participate in market-based credit rating business. As of Jan.1, 2019, there are more than 500 filing companies nationwide.
On Feb. 22, 2018, the PBOC issued the first personal credit License plate to Baihangzhengxin (百行征信, short for Baihang), with 8 key players in the market as its shareholders and more than 250 companies as its cooperating institutions.
Up to now, the PBOC’s Credit Reference Center has collected information of 990 million natural persons and more than 25 million enterprises and other organizations, accessing 3564 and 3465 institutions, with an annual inquiry volume of 1.76 billion and 110 million respectively.
Baihang Emerges as the Times Require
The construction of the domestic credit information system originated from credit-related businesses such as loaning and leasing. The PBOC's credit information is acquired from financial institutions, and the main users of PBOC’s Credit Reference Center are also financial institutions. Therefore, it is difficult for the credit system in PBOC to fully cover credit information outside the financial institutions to reach to individuals. And that is the main reason that the development of the personal credit rating lags far behind the corporate credit rating, not even to mention the personal credit rating system in developed countries.
With the development of internet finance in recent years, a large number of individual or netizens that are difficult to cover by traditional finance are becoming reachable online. At the same time, the risk of internet finance has become more complex and diverse. As information asymmetry has intensified, risks such as fraud and malicious default have appeared. Demand for credit information products and services are more urgent, however, it would be almost impossible to achieve system docking between the emerging internet organizations with the PBOC's credit system.
On one hand, the low entry threshold of the internet financial industry made companies far from meeting the basic requirement by PBOC in data standardization, compliance reporting capacity, data security mechanism and the protection system of investor privacy, etc. The legal status and regulatory framework of the internet financial institutions have not yet been clarified.
On the other hand, the technical limitation of internet financial institutions stops many institutions from information exchanging between the PBOC’s credit system.
Thirdly, the information of individual borrowers between the credit platforms and the P2P platforms is not shared, while the platforms do not have the incentive to cooperate with each other to prevent default risk.
Then the credit risk of mutual debt would create isolated data islands.
Baihang is established under these circumstances, aiming to connect the isolated data islands between from different internet financial institutions and functions as a substitution (a very helpful one indeed) of the PBOC’s personal credit information database. National Internet Finance Association of China (NIFA,中国互联网金融协会) owns the largest share of 36% of Baihang Credit, other 8 companies including Sesame Credit under Ant Financial and Tencent Credit, owns 8% of the shares, altogether making up the rest of the shareholders.
Moreover, Baihang will act as comprehensive access for small loan companies and online lending institutions, to realize information sharing and risk linkage warning between traditional credit information system and Baihang’s credit system supported by more than 500 other internet financial institutions (including Du Xiaoman, who newly launched its personal credit rating product Xiaomanfen), and to promptly identify and resolve the potential financial risks.
Difference Between the PBOC’s and Baihang’s Personal Credit Rating
Baihang’s personal credit data is mainly gathered from online activities. By using technologies such as big data and cloud computing, Baihang will dramatically expand the data category of the credit information database, promoted the technological transition of credit information processing methods and the traditional credit rating models, and will play an important role in improving China's credit system and even the social credit system.
Compared with PBOC’s traditional credit rating, Baihang’s approach differs in the main body of credit rating, credit data source, and data processing methods.
Firstly, the PBOC is in a dominant position in China's credit rating system, and the PBOC Credit Reference center has been interconnected with most commercial banks, some microfinance companies and financing guarantee companies. The main body of Baihang’s credit data is relatively decentralized, market-oriented and diversified. Internet companies represented by Baidu, Alibaba, Tencent, and JD.com, and existing market-based credit rating companies, such as CCX Credit and PY Credit, focus on a certain segment or a certain business segment to provide targeted and customized services on credit-related businesses.
Secondly, as mentioned above, the PBOC’s data source is mainly from loaning business while Baihang’s data are sourced online containing users’ transaction data, social-network data, dining, entertaining and other various scenarios which are called weak-featured data.
Last but not least, in terms of data processing, compared with the PBOC, Haihang has a relatively high requirement for data processing, data cleaning and data verifying. Unstructured data such as audio and text are processed to create a dynamic and continuous model. In the data collection and transmission, blockchain technology, especially the access mechanism of the alliance blockchain are applied in verification and supervision of data information.
Future Challenges for Baihang
As an innovative approach in personal credit rating, Baihang is also facing problems while bringing inspiration and reform to traditional credit reporting.
For one thing, the user’s privacy issues which have been continuously pointed out. The internet users are the ones with the highest authority for the use of user data. However, this fact has been neglected and will lay future risks of privacy leaking incidents.
In 2018, the European Union enacted a remarkable law, the General Data Protection Regulations (GDPR) involving 27 EU countries. The most important principle of this law is to protect personal privacy to the utmost extent, and strictly limit the conditions for the use of personal information data by enterprises and governments.
For another, the quality or authenticity of the massive data generated on the internet is questionable. The credit behavior online is a highly virtualized however not easy to examine and verify. In terms of e-commerce, the credit data accumulation basis of most e-commerce websites is based on the number of successful transactions, while ignoring the content and amount of transactions, so that the phenomenon of using credit transactions to quickly improve credit ratings, such as false evaluations and scalping (刷单) to increase the credibility and prestige of the website rating.
With the issues mentioned, Baihang as a benchmark for individual credit rating will definitely develop shared data standards, ensuring high quality and credibility of data, establishing a standardized personal credit data platform, and reducing the threshold for industry access.